News about a planned U.S. stimulus package helped pull investors into the dollar on Monday but U.S. Treasury prices slumped on fears a price bubble is about to pop in the face of a massive wave of fresh debt.

European equities advanced for the fifth session in a row, spurred by gains in shares of oil companies on the back of rising crude prices. U.S. stocks were mostly lower as investors took profits on the rally that was racked up in thin trading last week.

Oil prices hit a three-week high as Israel’s deepening incursion into Gaza and a Russian gas dispute heightened fears about supplies.

Prospects for a swelling supply of government debt drove U.S. and euro-zone prices down. The U.S. Treasury said it would sell $16 billion of reopened 10-year notes and $30 billion in three-year notes this week.

While the issuance was broadly in line with market forecasts, it underscored this year’s looming surge of debt that will to fund government efforts to rescue the financial system.

U.S. President-elect Barack Obama plans $310 billion in tax cuts as part of a rescue package of up to $775 billion, senior Democratic aides said Sunday. German Chancellor Angela Merkel met her Social Democrat (SPD) coalition partners to discuss a second fiscal stimulus deal worth up to 50 billion euros ($68 billion).

The 30-year Treasury bond fell nearly three full points in price, pushing its yield up to 2.92 percent, up from a record low near 2.52 percent in December.

“The back-up in yields shows a growing sentiment toward questioning the lower rate environment we are in right now,” said George Goncalves, chief Treasury/TIPS and agency strategist with Morgan Stanley in New York.

The euro hit three-week lows versus the dollar, with weaker-than-expected Italian and Spanish inflation data and tax cuts in Germany expected to pressure the European Central Bank to soon cut rates further.

U.S. stocks fell as investors took profits following last week’s sharp gains.

“Right now we’re just watching and waiting to see if there is any news from the new administration and what type of news it will be,” said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago. “We got a little bit of profit taking here,” he added.

Shares of Apple Inc rose after chief executive Steve Jobs wrote a letter aimed at dispelling investor concerns about his recent weight loss. Shares of the iPod maker rose 4.4 percent to $94.75 in early afternoon trade.

Before 1 p.m., the Dow Jones industrial average was down 79.09 points, or 0.88 percent, at 8,955.60. The Standard & Poor’s 500 Index was down 3.27 points, or 0.35 percent, at 928.53. The Nasdaq Composite Index was down 8.52 points, or 0.52 percent, at 1,623.69.

European equity markets were buoyed by the anticipation of further fiscal stimulus, drawing flows away from the safer-haven of government bonds.

The FTSEurofirst 300 index of top European shares ended 1.9 percent higher at 873.01 points.

The telecommunications sector was one of the biggest gainers on the index on the first full day of 2009 trading for many, with Swisscom (SCMWY) rising 5.2 percent, Cable and Wireless adding 4.6 percent, Vodafone (VOD) up 4.3 percent and Portugal Telecom (PT) rising 4.6 percent.

Sharp losses for the euro, which was down 2.28 percent at $1.3559, also spread to euro/sterling, taking it to 0.9278, well away from record lows for the pound last week and easing momentum towards parity.

The dollar rose against a basket of major trading-partner currencies, with the U.S. Dollar Index up 1.74 percent at 82.923. Against the yen, the dollar rose 1.31 percent at 93.43 from a previous session close of 92.220.

Longer maturity government debt fell, but shorter-term debt was little changed to higher. The benchmark 10-year U.S. Treasury note fell 34/32 in price to yield 2.47 percent, and the 30-year U.S. Treasury bond fell 102/32 in price to yield 2.94 percent.

Oil rose, and has gained more than 35 percent since Israel launched its attack on Gaza on Dec. 27, increasing concerns about the supply of crude from the Middle East.

U.S. light sweet crude oil rose $1.11 to $47.45 a barrel.

U.S. gold futures dropped, breaking below $850 an ounce, as investors took profits on the back of a dollar rally and signs of slowing physical demand.

Spot gold prices fell $22.45 to $852.60 an ounce.

Asian stocks rose to a two-month high on hopes massive government spending programs will revive a global economic recovery later this year.

The MSCI index of Asia-Pacific stocks outside Japan climbed 1.6 percent to a two-month peak, while Japan’s Nikkei average gained 2.1 percent in a shortened session to reach a two-month high.

NEW YORK, Jan 5 (Reuters)

“There has been a lot of talk recently about Embarq wanting to be acquired,” Kagan told MarketWatch.com. “However, the financial crisis that is on the front page every day made finding a partner difficult. That may have lowered the price Embarq hoped to get. CenturyTel saw an opportunity and jumped in to acquire Embarq. Timing was on CenturyTel’s side in this deal.”

The all-stock deal – announced yesterday (Monday) – calls for CenturyTel to pay $5.8 billion for Embarq, and to assume $5.8 billion of that company’s debt, Network World reported.  The buyout will knit together two phone companies with a local/regional focus that cater chiefly to customers in less-populated parts of the country, MarketWatch reported. The new combined venture will have operations in 33 states and combined revenue of more than $8.8 billion.

The acquisition “makes great strategic sense,” Glen F. Post III, the chairman and chief executive officer of CenturyTel, who will assume the CEO’s mantle with the merged company, said during a conference call yesterday. “It diversifies our revenue and provides us with expanded networks, expertise and financial resources to build long-term shareholder value.”

U.S. telecom carriers have spent at least $150 billion on acquisitions during the past three years as they bulk up to slash operating expenses – and to match up better against new rivals emerging from such businesses as cable TV and wireless communications. Already this year, Verizon Communications Inc. (VZ) agreed to buy Alltel Corp. for $5.9 billion in cash and $22.2 billion in debt, a move that makes it the largest U.S. phone company, Bloomberg News said.

Verizon reported its third-quarter earnings yesterday. [For additional details, check out Money Morning’s Global Investing (News) Roundups, elsewhere in this issue.]

CenturyTel rebuffed a $9.2 billion offer from Alltel in 2001, selling the phone-service operator its wireless assets instead.

Analysts expect the deals to continue – and probably to accelerate. Indeed, Credit Suisse Group AG (ADR: CS) analyst Chris Larsen wrote in a research note that the CenturyTel/Embarq merger would likely serve as the catalyst for the long-expected wave of consolidation deals between rural telecom carriers. Those deals could well include a move by Windstream Corp. (WIN) – the second-biggest rural carrier – to buy out the much-smaller Frontier Communications Corp. (FTR).

“We think a Windstream/Frontier transaction is the next most logical [deal],” Larsen wrote.

Consolidated Communications Holdings Inc. (CNSL) is also viewed as a potential buyout target, Reuters reported.

CenturyTel may also look at doing more deals within in a year, if there are more buyout opportunities that match up well, Post, the CEO, said.

Embarq solicited offers earlier this year, but the company’s plans to auction itself off to the highest bidder were shelved by the global credit crisis, which made it tough for potential suitors to line up financing for any deal. In early October, however, news reports surfaced that Embarq had hired JPMorgan Chase & Co. (JPM) to look for buyers for the company.

The Overland Park, Kan.-based Embarq is the local phone company created by the 2006 spin-off from Sprint Nextel Corp. (S), and its service area covers 18 states. It provides local and long-distance communications services to both consumer and business customers. This includes voice, data, high-speed Internet, satellite video and wireless services, sold both on a wholesale level and through third parties.

CenturyTel also provides local and long-distance voice, Internet, broadband and television services in 25 states. As of Dec. 31, its local exchange telephone services unit operated 2.1 million telephone access lines in 24 states, of which about 70% were concentrated in Alabama, Arkansas, Missouri, Wisconsin and Washington.

The buyout price of $40.42 per share for Embarq represents a 36% premium over the company’s closing share price from Friday.  Since Embarq is twice as big as CenturyTel, Embarq shareholders will own about 66% of the combined company after the deal closes.

Although Embarq is the larger of the two companies, it faces greater competition from cable operators and other telecom-service providers because it operates in some urban and suburban markets. The Monroe, La.-based CenturyTel operates almost entirely in rural areas where competition is less intense.

But the newly merged venture should be much more competitive overall, since it could realize annual savings of about $400 million within three years, executives with both CenturyTel and Embarq said on yesterday’s conference call.

While Post remains as CEO of the merged company, Embarq CEO Thomas A. Gerke will stay on to serve as executive vice-chairman.

CenturyTel yesterday reported operating revenue of $650 million for the third quarter of 2008, down more than 8% from the same quarter in 2007. Net income was $82.8 million, down more than 23% from a year ago.

Embarq yesterday reported operating revenue of $1.5 billion for the third quarter of 2008, down about 4% from the third quarter of 2007. Net income was up nearly 2%, to $160 million. Through the first three quarters of the year, the company’s operating revenue was $4.6 billion, down from $4.8 billion for the first nine months of 2007.

Once the deal is finished, the newly combined company will have about 8 million telephone customers, 2 million broadband customers, and 400,000 video customers.

The purchase is CenturyTel’s largest since selling shares to the public in 1968, and may pose a challenge – in part because it will bolster the company’s subscriber ranks in such economically hard-hit regions as Nevada and Florida, where foreclosure rates have jumped, Bloomberg said.

“This increases CenturyTel’s exposure to some difficult economic environments like Las Vegas and Florida, markets that have been a little more hard hit than they’re used to serving,” Stifel Nicolaus & Co. Inc. (SF) analyst Chris King told Bloomberg. King rates CenturyTel shares as a “Buy.”

Before the deal can close, stockholders from both companies will have to provide their approval. The merger will also have to pass muster with state and federal regulators. The companies hope to close the deal in the second quarter.

Source: CenturyTel’s Buyout Bid for Embarq Will Likely Jump-Start a Wave of Mergers Among Rural Telecom Players

They, therefore, maintain a majority stake in 18 public sector banks, which have 70% of the business, and have kept a cap of 74% foreign holding in the telecom sector. This hurts economic growth.

At a recent analyst meet, the CMD of Punjab National Bank, was asked by this columnist why it was that, given their pedigree (it is 113 years, SBI is over 200 years old) and their finances (both have produced excellent results), their market caps are, respectively, $4 and $ 23 b., far lower than the $450 b. commanded by ICBC of China, which is far younger and doesn’t produce such impressive results. Although, given China’s earlier start down the path of economic liberalisation, ICBC has a balance sheet more than 7 times larger than SBI.

Perhaps one of the reasons could be the reluctance of Government to bring down its ownership below 51%. In a globalised world this is stupid, because you Lilliputianise your large players (if I may coin a term). Look at the top Fortune 500 list and see how many are family owned. To grow to a global size, firms have to give up stakes and it will be institutional investors who would buy them. Bill Gates would not be the richest man in the world if he had held on to his 78% stake when he first listed; it is now down in the early teens. ICICI Bank is no less Indian even though more than 70% is held by foreign investors.

Dr Chakrabarty, PNB’s ebullient and frank CMD, made a good observation. If, he said, India is to become the third largest economy in the world by 2050, as everyone now believes, there must be financial institutions from India that have become global and will be able to serve the needs of Indian companies that would also have grown. PNB is taking steps to move in that direction.

It will not, however, happen, unless Government lets go of the fear of financial Armageddon if foreigners control the financial sector in India. One should think a majority stake in SBI plus one or two other large banks would be enough; the others must be allowed to grow through organic and inorganic growth.

In telecom the cap is at 74% for foreign holding. This is making it difficult first for Bharti Airtel and now for Reliance Communications, to make a sensible merger/acquisition of MTN of South Africa. Since foreign investors already hold 13% of R Com, Anil Ambani can offer a maximum of 61% (swapping it with a 33% stake in MTN to emerge as the largest holder of the combined entity); besides MTN has to make an open offer for 20% from minority shareholders.

The reason the Government retains majority control has less, however, to do with the wolf at the door syndrome, and more to do with controlling and appropriating the profits. That is why oil and gas companies are being looted. Indian Oil Corporation, a Fortune 500 company, has reported a loss for Q4 ended Mar 08. Prices of petrol, diesel and other petro products are kept artificially subsidised and the oil marketing companies like IOCL have to bear a part of this subsidy. They have run out of money to buy petro products and there is a looming rationing of petrol and diesel. Moreover, because they are partly compensated via issuance of non marketable petro bonds, they have had to borrow heavily from SBI which, in turn, has made its largest repo borrowing of Rs 13000 crores and has had to hike deposit rates.

There was even an asinine suggestion that in order to make up for loss of revenue if excise duties are reduced (the oil sector contributes some Rs 70000 crores, the highest, to tax revenue) the Finance Ministry was thinking of levying a cess on all taxpayers. Look at the ridiculousness of this! It means that for car owners to get cheaper petrol, all tax payers must pay! And this has got support of the Left parties!?!

Look further at the insane consequences of this. Facing a liquidity crunch for no fault of its, IOCL is thinking of selling its 7.7% stake in ONGC and 2.4% stake in GAIL!

All this to save car and truck owners the pain of paying market related prices for petrol and diesel! This reduces demand elasticity which is 16% in America and so leads to artificially high demand for them, and hence for oil, pushing up its price. Is this a responsible Government?

Under insistence from its Left coalition partners, the Government is following a policy of not selling profit making PSUs. Now that IOCL, BPCL and HPCL are hurtling towards becoming loss making PSUs one supposes they will be sold at bargain basement prices. Does no one in Government see that this is sheer idiocy?

The Government has to take several steps to make India a more energy efficient nation. One of these is to improve public transportation systems and to discourage private transport. During the past few years it has had hugely buoyant tax resources to allow it to do so. These, sadly, have been frittered away, a lot in subsidies which do not serve their intended purpose. Because of poor ports and roads, it is felt that power generation target of 70,000 MW would fall short by 20%, as the equipment would not be able to reach the work sites on time.

Look at the Government’s appetite for tax in the case of a tobacco company, for instance. Granted, tobacco is harmful to health and must be taxed. In the case of ITC, for the year ended Mar 08, the Government collected Rs 15,398 crores through excise and corporate tax, leaving a profit of Rs 3120 for shareholders. The ratio of Government share to shareholders’ share is 5:1. None of this has, however, been used for providing tobacco farmers an alternative livelihood to wean them away from tobacco.

In corporate news, Tata Motors is coming out with a rights issue of Rs 7200 crores to part fund its acquisition of Jaguar Land Rover.

Last week the sensex fell 234 points to close at 16415 and the NIFTY fell 76 to close at 4870. The fiscal deficit is hugely understated by all the off balance sheet bonds given to oil and fertiliser companies; the RBI Governor has quietly stated as much. Interest rates would have to be raised as inflation is not under control, partly due to Governments fiscal incontinence and largely due to its thoughtless policies of state control over important sectors (banking, oil & gas, coal). The US is also likely to end its interest rate cut cycle and start to raise them. Rising interest rates makes debt markets relatively more attractive. So it is unlikely that the sensex would do anything dramatic this calendar year.

Source:  Who’s afraid of East India Co Wolf?

The BSE sensex rose 474 points over the week, ending at 17,600 and the Nifty added 116 to end at 5228.

Other than DLF, Q4 PAT growth was encouraging at Reliance Communication (47%), Hindalco 49%, HDFC 40% and Corporation Bank (73%). Some more results in the next two weeks of the larger companies could enthuse investors and take the sensex up perhaps another 1000. Between now and then would be a good time to get lighter, as the next move would in all likelihood be south.

The RBI did not raise interest rates because the interbank rate is closer to the reverse repo rate so an increase would not really help suck out liquidity. The RBI Governor sees GDP growing at 8.1% this year, with a 35% gross domestic savings rate and a 36% gross domestic capital formation.

Though PAT growth has been generally encouraging, margins are under pressure by increased interest cost. According to Multi Consult P Ltd, for the quarter ended march 2008, sales of 818 companies are up 22%; interest cost up 41% and profit after tax up only 17%. This quarter shows a combination of higher interest cost and the squeeze on margins.

One concern is that, in order to combat inflation, which will become a political hot potato as elections approach, interest rates would need to be raised, sacrificing a bit of growth in the process. In areas where consumers rely on borrowing (automobiles, consumer durables, housing) this could impact demand and squeeze margins. Inflation is already at 7.57%, too high for comfort. Computation of inflation does not include several items (such as rent) which are commonly used; probably so as to contain the wages of Government employees which are linked to the official computation.

Globally, the falling interest rate cycle could be coming to an end and if the US currency weakens further, may call for a rise in rates to stanch the fall. One of the factors that can lead to a further weakening would be if other oil producing countries follow the example of Iran, which has reportedly stopped quoting for its oil in $ and uses a mix of yen and euro. Were others to follow suit, the US $ could come under greater pressure.

In the telecom sector, introduction of mobile number portability is likely to take some more time. This is the only thing that would bring in true competition for customer retention and so improve service standards. There is enough competition for customer acquisition (witness the slashing by Bharti Airtel of long distance telephony rates and roaming charges) but none for customer retention. Customers are locked into a provider because the hassle of informing contacts (and thus of losing out on some) makes them suffer inadequate service.

The Supreme Court has determined that R Comm and Tata Teleservices, which provided mobility on their fixed line networks, would be liable to pay ADC (access deficit charges) to BSNL of Rs 400 crores and Rs 300 crores respectively. R Comm claims to have already provided it in its accounts, with no impact on future profit statements. BSNL, on its part, is taking TRAI (the regulatory authority) for having phased out ADC, as it continues to provide telecom services in unviable areas, for which the ADC levy was introduced.

The Government is expected to sell big blocks of stock in 3 companies held by SUUTI, the entity that was formed to take over the assets of US 64 when it collapsed. It will start with the 27% stake in Axis Bank which is expected to be sold to various institutional bidders and fetch over Rs 9000 crores. Then will come its holding in L&T and in ITC. ITC’s stake sale could well attract the attention of BAT, which has been trying to get majority control and, with it, management control, for a long time.

With tobacco consumption declining in developed countries, BAT, Philip Morris and others are trying hard to get into developing countries like China and India, where sales are rising yet and profits are enormous. The tobacco used by foreign brands, however, is different from the variety grown in India, and tobacco farmers would find the going tough should local brands which use the local variety be phased out.

The rally can thus continue for a week or two, spurred on by more corporate results which are encouraging. One ought to use it to get lighter. There are too many imponderables for comfort at these levels. Not least being the poor fiscal health of the country and the neglect of planning for the future. Goldman Sachs says India is the worst amongst the BRIC countries in its spend on education. If only political leaders were to concentrate their minds on such matters, of planning for the future, rather than, as they do, on whether cheer leaders are needed, or whether actors should stop smoking in movies or other inane matters, it would be very welcome.

Have you read the latest Honest Truth by Ajit Dayal?

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.